The narrative about trading and investing in the cryptocurrency market is negative. Due to its volatility, most consider it to be mere speculation. Rather, with institutional adoption and wide acceptance, the crypto market is cementing its position as a gold mine. A vital discipline for building wealth in this market is technical analysis.
Simply put, technical analysis in the context of cryptocurrency is studying the historical data of a currency/token, measuring current trends and predicting its future price. In this discipline, a key tool is to identify support and resistance zones and leverage them to build a robust trading strategy.
In this article, we will discuss:
What are support and resistance in cryptocurrency trading?
Support and resistance in the crypto trade are two elementary concepts pertaining to technical analysis. In essence, these are the price levels that act as barriers to price movement. They act as indicators of the beginning of reversal trends.
When the cryptocurrency price drops consistently, support is a price level at which the downtrend is expected to stop. This 'support' is created by the influx of buyers looking to buy the currency at a lower price. The increase in demand manifests itself as a support for the currency.
On the other hand, when the price skyrockets, resistance is created at a price level where money holders seek accounting profits. They create a psychological barrier or cap on the currency's price as the perception of its overvaluation flourishes. At this juncture, the market is usually flooded with sell orders and promoted by those looking to enter short positions.
Here, the inference is to use support and resistance in crypto trading as key price indicators. But, the fact that they are not the law, but mere concepts developed from experience, must be remembered at all times.
How to Find Support and Resistance Lines?
Moving on to the practical application of the concepts, finding support and resistance in day trading is a little uncomfortable. Essentially, we are trying to find the price level at which the currency price faces correction. Some indicators that help us find support and resistance lines are:
trendline indicator
A popular strategy is to fit a trendline to a currency's price chart within specific time frames. In an ascending triangle formation, a trendline set at the highs marks resistance, while another trendline drawn between the lows reflects support.
Fibonacci Numbers
This is an advanced technique used to find areas of support and resistance using the Fibonacci retracement tool. Using price history to form a sequence, the Fibonacci retracement produces proportions to significant price points that can be leveraged to find support and resistance.
peaks and valleys
Analyzing the ups and downs of a currency over a period of time is the crux of this strategy. If the price of a currency hits similar highs and lows, they indicate strong market sentiments. In this, the frequently observed high and low act as resistance and support, respectively.
Moving average
A simple strategy that weighs on past trends in the currency and produces average prices for a specified period of time. Moving averages for different time ranges such as 10 days or 52 weeks can be used to find short-term and long-term support and resistance zones.
How to draw support and resistance lines?
Drawing the support and resistance lines is a fundamental asset for every cryptocurrency and/or investor. For this, a quality graphics tool like TradingView is required to get started.
Find suitable deadlines
Before drawing the lines of support and resistance, it is vital to clarify the objectives. For short term trading, time frames below 6 months are sufficient to analyze support and resistance. However, for the long term, data load points of at least 12 to 18 months are desirable.
Identify Price Zones
Within the given timeframes, there should be groups of price rises and falls that portray high volume trading activity. These zones are often indicators of past levels of support and resistance. Identifying 3 or more price zones, depending on the time period, should give you a fair idea of how the currency behaved.
Support and resistance lines design
Connect the identified price zones with a horizontal line. For price zones in an ascending triangle formation, the horizontal line is resistance. And similarly, for price zones in a descending triangle formation, it should be support.
Courtesy of TradingView, here is an image showing the Bitcoin (BTC) price chart for the year 2021. In the chart above, the $32.000K activity zones are present at three distinct times, reflecting the peak in demand for BTC . At this price point, buyers were continuously accumulating BTC, indicating strong support.
On the same price chart as the BTC, $58.000 has emerged as a strong resistance zone. At this price point, a psychological ceiling is formed as bullish sentiment fades. Despite occasional discoveries, the range between $57.000 and $60.000 acted as resistance, giving rise to trend reversals.
Well-constructed lines of support and resistance are a symbol of a reliable trading strategy in the crypto market. To increase strategy accuracy, learning how to use TradingView is highly recommended.
What are the best support and resistance zone indicators?
Today, there are many automated and custom tools on the market for cryptocurrencies to leverage. Amidst a plethora of options, here are the best support and resistance zone indicators. Each of them is time-tested and fundamentally strong in the market, whose prominent feature is volatility.
Fibonacci Bollinger Bands
This particular indicator features the popular Bollinger bands, a three-line band, plotted for a fixed period of 20 days and calculated using the volume weighted moving average. In line with the Fibonacci retracements, this is one of the most accurate support and resistance zone indicators on the market.
Pivot Point
Pivot point analysis takes into account the three price points (high, low and close) of an asset. When divided by three, the pivot point is reached. This indicator, after calculation, provides three support levels and three resistance levels, giving an insight into the market's range and sentiments.
Auto Fiber
As mentioned earlier, Fibonacci rates are a great way to find support and resistance zones. The same is leveraged by this indicator which plots the fib levels between high and low for a specific user time period. Using this in TradingView, Fibonacci lines are plotted automatically, easing the trader's workload.
Conclusion
This articulation is intended to be a step forward for traders looking to build a robust trading strategy built on the elements of support and resistance. They are trustworthy elements that, when implemented correctly, break all limits on earning money in the crypto market.